Beyond Market Cap: Endowment Investing Strategies with Meb Faber

Episode Transcript
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Speaker 1 (00:00):
I certainly appreciate those that continue
to attend these webinars, as Ihost them for various clients.
This will be a great one, notto oversell it, but I'm a big
fan of Meb Faber's and what he'sdoing.
I think many of you will findit interesting.
My name is Michael Guy, apublisher of the Lead Lag Report
, and here is Mr Meb Fabertalking about what Cambria is up
to.

Speaker 2 (00:19):
Meb.
Go ahead.
Thanks, man.
Good morning everyone.
It is a rainy day here in LosAngeles, so I'm glad y'all are
joining me on early March.
A couple of things.
One, y'all this is going to becasual and fun.
We got a nice tight group here,so feel free to lob some
questions in the Q&A.

(00:40):
For those who know me, thosewho don't know me, let's make it
fun.
I'm going to run through apretty brief presentation, but
you guys, absolutelyintermittently, put in the Q&A
and I'll hit them up as we go.
So I'm going to go ahead andshare this little deck I have.
That's not too long, so let'splay this from the get-go.

(01:02):
Let's start.
So what are we talking abouttoday?
We're going to talk about twothings One, this new ETF we're
launching and two, the method atwhich we're launching it.
And so, throughout thispresentation I gave a similar
talk recently down in OrangeCounty I'm going to say you're
going to get a warning in thepresentation, you're going to

(01:24):
get a solution, you're going tolearn something totally new
you've probably never heard of,and then, if we get time, we'll
talk about the head scratcher aswell.
Well, for those who don't knowme, just super, super, duper
quick.
My day job is managing ETFcompany called Cambria.
You can go to cambriafundscomto find info.
Cambria Investments we have afree once a week research email

(01:46):
called the Idea Farm goes out toover a hundred thousand people.
You can watch me pick fights onTwitter, but we put out a lot
of content.
So MebFavorShow podcast over Ithink five 600 episodes.
Blog MebFavorcom got like athousand posts all sorts of good
stuff everywhere.
Let's get to that warning Firstof all.
Where it's good stuffeverywhere, let's get to that
warning First of all.

(02:06):
I don't care the stock market'sdown this year.
It has been a ripper this past15 years, one of the best
periods in history.
This chart is rolling 10-yearreal US stock returns after
inflation and what you can seeis these four mountaintops,
dolomites, rocky Mountains,whatever you want to call these.
There's been four periods wherethe US stock market's done 15%

(02:27):
per year or said differentlyhere you know closer to probably
12% a year real, and there'sbeen three or four periods
likewise where it's also beennegative, and we all know those
periods right, like they havenames.
The 20s was roaring.
20s, nifty 50 stocks of the 50sand 60s yeah, the internet
bubble of the late 90s myfavorite.

(02:48):
And then whatever this COVIDmeans stock mania.
But then also look at thosegenerational buying
opportunities too 19, you knowteens.
Right before the roaring 20syou had the Great Depression
period, then you hadinflationary 70s, setting the
stage for the early 80s bullmarket, and then GFC 2009, right
, so this chart's a pretty goodindicator on sort of these

(03:11):
secular bull and bear markets.
And you know, some people willclaim that it's just an interest
rate phenomenon, which you knowwe're not at zero anymore.
But you could do Sharpe ratiotoo.
And so Sharpe ratio for USstocks.
Again, these are different.
If you kind of toggle back andforth, you can see that the
mountains are different sort ofsize, but you can still see that

(03:34):
there's four big ones in thesame periods.
And so sharp ratio of one forthe US stock market, ladies and
gentlemen, that's usually around0.2, 0.3.
There's times where it's beennegative, there's times where
it's been above one.
But above one is like a hedgefund two in Trinity, you're a
billionaire.
You got that sort of numbers.
Anyway, pat yourself on theback.

(03:55):
It's been good times.
The stock market has been a 10bagger since 2009.
Nasdaq is closer to 20 bagger.
So what does that mean?
That means everyone should befat and happy, we should be
celebrating, we should beexcited about these good times.
But where do bull marketsusually lead?
Well, they usually lead toexpensive markets.
Not always, but if you were tolook at those overlay, those

(04:18):
four charts, you could see thatthey were at kind of the four
similar peaks in this chart in1920s, got the nifty-fifty
internet bubble and then thisCOVID meme, stock era, and then
said differently look at theregional minimums, gfc, early
80s, great Depression, on and on, and I don't think that the

(04:41):
stock market's in a bubble.
To me, the 10-year P-U ratioreally needs to be above 40 to
just be totally crazy.
And we've built these for allthe other countries in the world
.
So you've seen a lot of othercases where countries have been
40, 50, 60.
You've seen them even as highas 80 or 90.
And said differently, you'vealso seen them in the low single
digits.

(05:01):
There's a handful of countriesaround the world that are single
digit now, one of the reasonsthat the cheap countries are on
a face ripper this year.
They're beating the US stockmarket by 20 percentage points
already out the gate in thefirst two months of two and a
half months of this year, butthat's been a long time coming
right.
Foreigns underperformed forprobably 15 years.
But the point of all this isthat it's been a really good

(05:22):
time and most people now havemost of their money in US stocks
they always did, but now theyhave even more.
And second, they have probablymost of their money in
concentrated names.
This is a well-discussed topic.
Right, media loves talkingabout MAG-7.
They love talking about howconcentrated the stock market is
, on and on.
But the reality is, whensomething goes up, a lot, you

(05:44):
know, the P and the PE ratiostend to tends to go up more than
the E does, and so you havethis market.
That's right around.
I think it was 38 has come downa little bit as the market sort
of plateaued gone down, butit's not 12, which is where it
was in 2009.
So you've had this hugemultiple expansion.
But a lot of people are sittingon these big US stock gains and

(06:06):
the problem with that is one,they're concentrated.
Two, they say Meb, I can't sellthese because the tax man will
kill me.
I got too much money in NVIDIA.
I got too much money in XYZ.
I can't sell it.
Tax man's going to kill me.
We'll have a solution for thatlater.
But so first up is the warningWarning.
Is US stocks, market capweighted or expensive?
There's no question.
You cannot find a stock marketindicator that would say US

(06:29):
stocks are cheap.
You know I challenge you.
If you do find some, email meI'd love to see it.
But on average they're veryexpensive.
But people can't sell them ordon't want to because they don't
want to pay the taxes.
But most people already, youknow their portfolio is offside
right.
So if you started with a 60, 40in 2009, you may today have a
80, 20 or even more.

(06:50):
So you got, and in all the theevidence shows this.
If you look at Ned Davis charts, they got household as a
percentage net worth, how muchthey put in stocks is an all
time high on and on.
Even as a percentage of globalstock market or acquiesce is
knocking on two-thirds 70, andthat's just the index.
Most people I talk to in the usit's closer to 80 90.

(07:10):
We should have done a poll andasked you guys, but um, again,
we have uh, we're light on thequestion, so you guys send some
in.
If you have some, um, we'llmove on, though usually cape
ratio triggers someone that uhis?
Is uh really wants to to losetheir mind?

Speaker 1 (07:26):
can I get triggered on this?
Can I, can we talk?
Yeah, it's just like the.
The criticism around thek-pratio is it's trolling, 10
years right, and there's someweird dynamics, you know, post
bubble and qe and all this stuff.
I mean, is there any any chanceat all that it just isn't
really a valid metric because ofwhatever cycles?

Speaker 2 (07:50):
Sure, there's a lot of chances.
You know, my thing is I oftensay I don't think the K ratio
actually really matters, youknow.
And so at the Idea Farm wetrack four or five different
10-year metrics.
We track 10-year price to bookprice, to cashflow price to
dividends, on and on.
They all say the same thing inextremes.
You know, when you're in thekind of messy middle, the
indicators usually diverge a bit.
But if you're like March 2009or today, or March 2000 or early

(08:15):
80s, almost always they'll endup on the same side of the
seesaw.
And it's not just 10-year, youcould look at one year, you
could look at forward.
But the key to me is never tojust bet all your chips on one
indicator, because you could bepicking up something weird
that's going on in the marketsand so valuation and it's also
like a.
It's like a, a flock of a flockof starlings or swarm of bees

(08:41):
where you look at it, and thecomposition kind of changes over
time and moves and so theopportunity set is not always
the same.
You know, in the late 90s youhad this mega cap, super
expensive market cap, weight,which is usually what happens
when things go up a ton, but atthe same time, value stocks and
small caps were totallyreasonable.

(09:03):
You know, in the early 80severything looked pretty cheap
on and on.
And so what happened in thelate 80s?
You know Japan was expensiveand you have these just sort of
rotations and you knowsituations.
And so you know again andhere's the fun part about being
a quant using indicators likevaluation is like it's only
giving you a spectrum of futureprobabilities and this isn't.

(09:26):
I can say this on the guy atshow, I can't say it on CNBC and
get into this.
But if you look at I love theold John Bogle wrote about this
in the 90s.
He called it like Occam's razorof valuing stock markets and
he's like look, it's a supersimple formula.
You start with dividend yieldplus dividend growth and change
in valuation and that's the 10year return you're going to get.

(09:47):
And he's like you can plug individend yield, that's known.
You can come up with whateverdividend or earnings growth you
think is going to happen.
It's not known, but obviouslywe've had a great earnings
growth the last 15 years.
And then a big fat one thatnobody knows is change in
valuation.
But you can see how much thechange in valuation affects
these, some, some of thesesecular and cyclical bull

(10:07):
markets, you know, going from 12to almost 40.
In many cases that ends upbeing like a five, 6% tailwind
per year, not just over thewhole period, and so you can't
count on that and that's.
That's a hard thing to you know, guess when it's going to
happen.
But but, on average, buyingsomething at 40 versus buying

(10:28):
something at 12, like.
The struggle for me iseveryone's always like well, is
the K ratio 38 or 35 or 40?
When in reality the question isnot is it, you know, 38 or 40?
Is it, is it 40 or 10?
And, you know, valuation to meis always the best analogy I
heard.
It's like using, you know, theHubble telescope you move it an

(10:50):
inch and you're in a totallydifferent galaxy.
So I don't want to optimize onthe right of the decimal point,
I want to just be, broadlyspeaking, with valuation, and so
that's why we like to couple itwith trend as well.
We're big trend followers forthose who aren't familiar with
us.
So valuation and then valuationto me is like the yellow

(11:10):
flashing light.
So what is my expectation?
I tend to agree with Vanguard.
Vanguard thinks US stock market, broadly speaking, is like low
single digits, mid single digits, and you know that doesn't mean
it has to be like minus 10 ayear, but it just probably isn't
going to be 15, which is whatwe've been doing.
It's more about expectations.
But Bogo himself there's agreat video of him talking about
the late 90s where you knowhe's everyone assumes Vanguard,

(11:32):
like market timing is the worstthing in the world, and he talks
about how he was selling stocksin the late 90s and buying
bonds.
Now he wouldn't say somethinglike sell all your stocks but
move something from like a 60-40to a 50-50 or a 40-60 is
totally reasonable, which Ithink would drive all the Bogle
heads crazy.
It'd be like here's my quote ofMeb saying this They'll all

(11:54):
lose their mind and I'll be likejust kidding.
That was John Bogle, you know,anyway.
So solution what can we do aboutit?
Here's this new fund we'relaunching.
By the way, we have 16 ETFs,almost 3 billion in assets, but
this is a fund.
That's interesting because thisgoes way back to the first book
I wrote over 15 years ago Imean, it's almost 20 years ago

(12:15):
at this point which is the IvyPortfolio.
It's my first book.
If anybody's read it, you'drecognize this cover.
That's what six, seven booksago, and I don't even know how
many white papers.
But the point of this book wasreally looking at David Swenson
and others and how they manageportfolios and the endowments
are a little different than youand I or most of us.
The endowments historicallyhave.

(12:40):
They don't pay taxes, whichawesome.
Second is, they say they have areally long time horizon, right
?
So their goal is really tomanage this endowment, beat
inflation, but really to buildit and grow it over time, not
just for current students, butfuture students and alumni, but
also employees, the university.
Some of these contribute to anon-trivial amount of the budget

(13:01):
, so they don't want to lose itall and nuke it, but so.
So if you're given that mandate, what does that mean and what
does that historically mean?
Well, there were great examplesreally in the 20th century of
Harvard, yale in the 21stcentury as well, less so
recently.
But these groups, there's kindof two defining characteristics.
The first is an equity-likefocus.

(13:22):
So if you go pull up Yale'sannual report, like oh my God,
yale only has 2% in US stocks,but the reality is they have a
lot of equity-like exposure.
So they have private equityventure capital, they have US
stocks, they have foreign stocks, they have hedge funds, all of
which gives them some equitybeta.
Second, they tilt towardsactive where they feel like they

(13:43):
can add value.
And we acknowledge in this bookwe say one of the best things
they do is they were early to alot of these investments in
styles, way before it was cool,way before it was popular, way
before the Yale model was even aphrase, right doing Timberland

(14:07):
before anyone else, yale, pe andVC.
Well, here we are in 2025 andeveryone's doing that.
So we actually just wrote arecent paper that walks forward
the last 15 years in theendowment models called Can we
All Invest Like Yale, and we'llsend it to you guys if you don't
have to go find it right now,but it's really the basis for
this fund and this fund.
We've had something like thisfiled for I don't even know how
long 10, 15 years.
So we managed three assetallocation fund of funds.

(14:30):
Already.
There's GAA, which is like abuy and hold global market, so
that's like a moderate portfolio, and then we have a trend
following fund, gmom, andTrinity is sort of in the middle
.
This one is meant to be like anaggressive asset allocation
portfolio, so it's going tomodel what Swenson and others

(14:52):
even recommended in his bookUnconventional Success.
We talked about it in this book.
He said how can you model theYale endowment without access to
private equity, venture capital, all those good things right.
And so we said there's a lot ofpapers and academic research in
this white paper that says heylook, you can actually do a
pretty good job of modeling whatHarvard and Yale and others

(15:15):
have done.
And Yale historically beatssort of the Nakubo endowment
average by about threepercentage points per year.
So they're much better than andso we're going to wrap this
into a fund and we'll talk aboutthe fund in a minute.
Let me, let me kind of let mepull up this, this paper,
because I think it'll be helpfulto talk about a little bit real

(15:36):
quick.
The golden age of endowments wasreally the early 2000s, mid
2000s and actually right around.
I can't remember when this bookactually published, but you
know the endowments had somehard knocks too.

(15:56):
You know 2008, 2009 was toughfor a lot of them.
You know they only mark theirportfolios once a year, june
30th, so entry year.
You don't see what's going on,but you can model out the
portfolios and come up with apretty good guess.
So, despite the fact that since1985, which is when Swinson
took over Yale's endowmentstunned over 13%, 60-40, not bad
, did 10% and S&P again just anamazing period for US stocks

(16:20):
almost 12%.
But really the period post-GFCagain has been all US stocks.
So S&P 15%, 60, 40, around 10,which again is not bad.
Right, the average endowmenteight, yale 11.
We wrote a paper called the bearmarket and diversification and
we were talking about this last15 year period where, you know,

(16:42):
s&p has creamed everything Likeit has just been a just just I
don't even know the rightanalogy, it's just been a
haymaker, just crushedeverything.
And so this has arguably beenthe worst period in history for
US stocks relative to adiversified portfolio.
But diversified portfoliosdidn't do poorly, right.
10% for 60-40, amazing.

(17:02):
You compound a 10%, you'regoing to beat everybody.
But the problem is that's 10%when your neighbor, who's just
dollar cost averaging into S&P,or God knows, fartcoin and
Dogecoin, or you know Nvidia orwhatever else you know, has done
15% plus.
And so, in terms of absoluteunderperformance and number of
years in a row, you've reallynever had a period like this,

(17:26):
except with the exception ofprobably the 1940s, anyway.
So the endowments haven'tlooked as spectacular, but over
the full period they lookedreally amazing.
But the big question often isokay, so in the paper we walked
through and said, well, whatdoes Swenson's recommendation
look like?
And if you go back to 1985,it's similar.
It does about 10% a year,reasonable volatility, but kind

(17:47):
of looks like 60-40.
But again, this has been agreat period because of the S&P
in the 60-40, the 60.
But if you start to do stufflike tilt away from market cap
weight and so what is theallocation?
What did Swinson actuallyrecommend In his book?
He said 20% US stocks, 20%foreign stocks, 10% emerging
markets.

(18:07):
So already, by the way,listeners listen to that 20% US,
30% foreign and emerging.
So he was already saying putmore in foreign and emerging
than US, which is a huge outlier.
20% REITs, which technicallyare US stocks, 15% US bonds and
15% TIPS.
So for the real asset bucket.
So if you then tilt away, addthings like value and momentum

(18:30):
and trend, you know that addsanother percent to your per year
performance for no real pickupand volatility and drawdown.
But the big one is we're stillnot there, right?
So you still don't get quite.
Get to the Yale endowments 13%.
You're up around 11.
But the thing is for privateequity, for venture capital, for
a lot of the hedge fundinvestments, those are already

(18:52):
levered investments.
I mean US stocks are leveredtoo, right.
The average stock has debt onthe balance sheet, so they're
all leveraged.
So the question is, how do youkind of get to that 13% and will
leverage help or kill you, helpor kill you?
And so we look at it in thepaper and we show that if you
add, you know 150% total, so 50%leverage.

(19:16):
In fact you can get up to the13, even 14% numbers.
Now you get a tick up involatility, right.
So if you look at kind of a lotof these allocation strategies,
they're around 10 or low teensFor this portfolio.
You know US stocks tend to be15 to 20%, so so this ends up
being in that sort of stock likevolatility.
So not nothing Right.
But you got to remember YaleEndowment Average Endowment
worst year they printed wasabout down 25 in 2009.

(19:39):
But if you do the investableversion of that, that was
probably entry year down 50.
Right, which is about the sameas almost any other portfolio,
diversified portfolio like 2008,2009,.
You probably were down half atone point, which is painful
right.
For a lot of people it's um, butyou know, for the person who
says, look, I don't care, I'm,I'm thinking about the next 10,

(20:01):
20, 40, 50, 90 years, it's aninteresting way to think about
leverage.
Interestingly enough, rayDalio's Bridgewater just
launched a new ETF, I think,this past week, that's leveraged
almost two times theall-weather ETF and charges more
than this one, by the way.
Anyway, I'm going to answer acouple of these questions
because they're coming in andthey may be.

(20:22):
Yeah, I can get you on that man.

Speaker 1 (20:25):
So let's see yeah no worries.
You said to expect vol to benear the same as stocks, but can
you outline some scenarioswhere E&DW would really struggle
and maybe down 30% or more?
Ah, the always fun question ofmax drawdown risk, yeah, so
let's see where thediversification of assets would
all be down.

Speaker 2 (20:43):
That much you know.
So let me get to.
Let me fast forward this slideone.
And, by the way, this fund willbe less than 49 basis points.
It says 59, but that's anoutdated expense ratio so we
don't charge a management fee.
It's the underlying ETFs.
They'll probably be around 15,20 ETFs in this portfolio.
Again, we have three otherasset allocation ETFs you guys
can look at this.

(21:04):
One will be 49 or below.
I need to update the prospectus, trying to be conservative, but
let's see.
If you look at.
So the allocation, you know whatwe're targeting here on the low
end is that 130 to 150%.
So 60% equities, 30% fixedincome and another 20 each in
real assets and alternatives.

(21:24):
And what do those mean?
You know real assets is stufflike tips, real estate,
investment trusts, commodities,commodity equities, gold, gold's
up near 3000, y'all Also gold.
Do you know that this centurygold has outperformed US stocks?
And I believe I don't know.
Reits have kind of struggledlately, but REITs had also

(21:45):
outperformed US stocks too.
Alternatives you knowalternatives can mean anything.
Where we tend to be a trendfollowing crew, so that majority
would be trend following, isthat the premier diversifier to
apply and hold long only assetallocation, so that notional
exposure gets you up to around140 percent.
You know it may drift a littlebit.
We're targeting around that 130to 150.

(22:06):
We're targeting around that 130to 150.
But again, this is a globalallocation.
This isn't just US stocks,which, hey, after this year
people may be interested again.
We may finally have the USstock versus foreign turn.
Who knows, we've got a few headfakes, but anyway.
So we wrote an old book calledGlobal Asset Allocation I hope
to update it this summer and itlooked at all the famous

(22:28):
portfolios permanent portfolio,risk, parity, 60-40, endowment,
everything and you really can'tfind an asset allocation that
doesn't lose a quarter at somepoint.
Right, like they're going tolose a quarter or a third.
There's nothing that doesn'tlose a quarter and on a real
basis it's worse, and hopefullyin this new updated book.

(22:51):
So we only took it back to the1970s in the first version.
I like to take everything backto 1920s.
Then it's a whole different bagof chips, right.
1920s, 1930s.
You add on a much biggerdrawdown US stocks were down
over 80.
And so really any portfolio,the longer you go back, the more
, only the bigger the drawdownscan get.

(23:11):
So you know, we wrote anotherpaper sorry, we've written a lot
of papers getting old calledwhat is the safest investment
asset?
That's a really fun paper,because most people assume that
means T-bills.
But the thought experiment wedid is we said look, what about
on a real basis?
So the only thing that mattersin all investing is what are

(23:31):
your real returns afterinflation?
And said what is the safestasset?
So let's say you got $100million, $10 million, $1 million
, whatever your definition ofrich is Say I don't care about
making returns, I don't want tolose it.
What's the safest thing?
And I think most people wouldassume T-bills, but T-bills on a
real basis have declined byhalf.
Think about that for a second50%.

(23:56):
You don't see it on the nominal, but after inflation, and we
just had a period where bondyields were below inflation for
an extended period.
So in reality, there's only oneother person I know in the
entire world that thinks thisway and that's Michael Saylor,
though he comes to a differentconclusion, which is if you look
at your safe money, your cashwe do this for my company too

(24:16):
the safest investment is notT-bills.
It's a diversified globalportfolio and you can look at
this in terms of drawdown, oneyear max loss, volatility, all
these various metrics right, andcome to the conclusion that
T-bills is actually riskier thana diversified portfolio.
Anyway, what do I expect forthis portfolio?
Look, I think it could lose aquarter or third.

(24:38):
I think there's a scenario, butI would apply this to any asset
allocation.
I think I could come up in myhead with a scenario where it
loses half.
Right, but that's everything.
Like I come up with anyportfolio that loses half at
some point.
So long-winded answer to yourquestion, but I think it's
important to put this intocontext and the good news is, in

(25:00):
all these papers and books, wemodel this out.
So in the Can we Invest LikeYale, we look at this portfolio
and how would it have donerelative to everything else?
The answer is yeah, like you'regoing to, you're going to go
through this period at somepoint.

Speaker 1 (25:13):
Yeah, I would add, on a long enough timeframe.
You will have at some point ananomaly, right?
You can already have to havethe worst parity in 2022.
And we're history right For,and that's supposed to be as
diversified as it gets, right,yes, right.
So yeah, these things willhappen.
If there were something thatdoes not have a big drawdown, it
will be made off.
I think it's sort of the mainpoint.

(25:33):
Let's get a little longerquestions here from an anonymous
attendee.
The market has been high for along time.
Just keep going up.
What are your thoughts on thedirection of the market in 2025,
especially with tariffs and thegovernment's supposed plan to
not intervene in markets?
I think this should answeredalso, maybe from the perspective
of the broader suite that youhave.

Speaker 2 (25:52):
Yeah, because I think that's interesting.
Yeah.
So the funny thing, y'all, is,my biggest fund is a US
long-only stock fund.
It's over a billion.
So I'm not just preaching mybook here.
You know my warning was broadmarket cap is expensive.
So what If you look back inhistory, the past 100 years, and
you put stocks into a quadrantbox of uptrend, downtrend,

(26:15):
expensive and cheap?
The best market is a cheapuptrend.
The second best is an expensiveuptrend and that's where we are
now right, like we've beengoing up and getting more and
more expensive.
But the bad part is the worstmarket is an expensive downtrend
and more expensive.
But the bad part is the worstmarket is an expensive downtrend
.
So when we flip from thatexpensive uptrend to expensive
downtrend, that's really whereit goes from yellow to red

(26:35):
flashing light.
We're starting to see someindicators flip on that.
You know most of our trend andmomentum type of strategies are
kind of rolling over from USstocks.
We have one fund called Vamowhich it can be anywhere from
100% long only to 100% hedged.
It's currently 75% hedged.
So it's definitely signalingsome caution.

(26:58):
But we think value is just fine.
You know, if you look at mostof the big quant shops GMO
research, affiliates, aqr youknow, this value spread between
cheap and expensive has beensome of the highest levels it's
ever been over the last fewyears, so earlier, when I said
the warning, that's market capweighted stocks.
But the alternative is valuestocks and foreign and emerging.
Look just fine, you know, wehave one fund that focuses on

(27:21):
the cheapest countries in theworld through CAPE ratios and
that fund is, I think, is, up15% this year, so beating the U
S stock market by 20.
Now it's been a massive laggardfor the majority of its
existence since 2014.
So it's 2013.
Um, but uh, but it's waycheaper.
I mean, in most of these, evenwithin the U S right, the value

(27:44):
portfolios and you guys don'thave to believe me to
morningstar type in syld versusum, you know, spy or something
you know give you a snapshot ofthe underlying holdings in that
portfolio.
And we have small cap and largecap, all these different type
of funds, and it'll show youthat the valuations are like
half or a third of the broad usstock market.

(28:04):
Again, I don't think it matterstill it does.
And hey, guess what?
We even have have a tail riskfund.
So the tail risk fund issomething that you can buy if
you're really bearish and youdon't want to sell your stocks,
you can buy the tail risk fundto partially hedge, you know,
some outlier down markets.
It had a really good dayyesterday, not surprisingly, but

(28:25):
on average.
That fund is kind of designedto lose money and having a good
day today too, anyway.
So you know, and so someone,adam, asked where, where does
this fit in, since it's levered?
You know, could it, could it beused in a portfolio?
You know one of the nice thingsabout markets and I said this
in our Yale paper I said there'sa great quote and it says I'm

(28:47):
going to, I'm going to try torecall it by memory, but it's
from William Feather and he'slike the nice thing about
markets is that every timethere's someone buying, that
means there's someone sellingand they both think they're
astute and so you can come away.
You could read this paper Iwrote and say, oh, I'm just like
why I'm just going to 60, 40.
Like what's, why would I wasteall this time and effort?

(29:08):
Others will read it and be like, oh, I get Swenson what he's
saying.
I definitely need foreign, Idefinitely need some emerging
and real assets, otherwise thisportfolio is not, you know,
well-balanced and others will belike.
I even like what Meb's sayingGive me some juice.
I'm going to add some leverageand tilts to things like value
and momentum.
Let's do it the two main wayswe see people use this portfolio

(29:31):
.
So let's say you're anindividual, theoretically this
could be your entire portfoliobecause it's going to own
underlying 10 or 20 ETFs whichare going to underlying own
thousands of stocks.
So theoretically, you ownprobably 10,000 plus positions.
That's a pretty diversifiedportfolio.
It's diversified globally.
It's diversified foreign.
It's diversified real assets.
Most financial advisors,however, are not going to just

(29:52):
buy one ETF and call it a dayright, because then the clients
call you up and say what am Ipaying you for?
So most people would use this,as well as our Trinity ETF, as a
diversifier.
They put it in the risk bucketbecause traditionally they own
US stocks and bonds only, andthis fund will give you foreign.
It gives you emerging, givesyou tips, gives you commodities,

(30:14):
gives you all these otherthings and some leverage.
So, theoretically, this isgoing to be a I don't want to
call it very aggressive, but itwill be an aggressive allocation
strategy that gives you thisequity-like focus plus leverage.
So it's an interestingcombination that I don't know
really exists in a way that youknow others have.

Speaker 1 (30:37):
By the way, I think it's worth mentioning.
What is not theoretical is thatthe volume on an ETF like this
is irrelevant, right?
I mean when it comes out,because it's got ETFs in it
themselves.
You know significant assets.

Speaker 2 (30:48):
Yeah, yeah, volume, remember, listeners.
You always use a limit order,but if you go through a debt
like you got a million, 10million, 100 million, chances
are you can pretty much alwaysget in right around net out, net
asset value on any ETF and Ican't say guaranteed, but really

(31:09):
it doesn't matter if it tradesone share a day, it's really
what does it own.
And so if you own a large capUS stock fund super liquid even
if it trades one share a day, ifyou own a small cap Brazilian
tech fund, a little bitdifferent, right.
And so most of these desks cando their own custom creation
redemption orders.
This doesn't apply just to thisfund, really any any etf in the

(31:32):
world anyway.
So let's do one or two more ofthese questions while we're kind
of on this topic and then we'regoing to get into a really cool
new idea that none of you haveheard of well, I'm one of us has
.

Speaker 1 (31:44):
I mean, yeah, uh, I have one from Boris here, the
one about the S&P creamingeverything.
So it's got a good memory.
You saw it back in 2013, 2014.
You mentioned they speak of thecap-weighted nature of the S&P,
which clearly were spot on.
You didn't say that, which Ithink you did.
When they serve as indirectevidence that we're indeed in a
bubble, I will say, for whatevertour, it's not my show,

(32:04):
obviously on this webinar, I'vecalled this the concentration
bubble.
Yeah, I like it.
I think that's sort of accurate, maybe starting to pop, but go
ahead.

Speaker 2 (32:12):
So we just we just hit a little bit of rabbit hole,
but it's good Cause we got 30minutes left.
You know, some of y'all allknow this, but I think it's a
really interesting topic ofdiscussion.
Go grab one of your friendswho's maybe kind of tangential
to markets, or your spouse orniece or nephew or kids, someone
who knows about markets and youknow, ask them you know, hey,

(32:36):
what do you invest in?
They say, well, I index or Ibuy the S&P, you know, and so
it's okay.
Well, you know, how is that?
How are the weightingsdetermined?
And they'll say, oh well, it'slike it's the biggest companies
in the stock market.
And you say, correct, butbiggest by what measure?
And usually 99% of people don'tknow the answer to this.

(32:57):
They'll say, well, it's likeApple and Microsoft are like the
big, like their sales andrevenue and earnings.
And you say no, no, no, no, no,no.
Big like their sales andrevenue and earnings.
And you say no, no, no, no, no,no.
The only factor that goes into amarket cap weighting is price
of the stock times, the numberof shares there are.
That's it.
That is the definition ofpassive investing, and most

(33:18):
people don't know that.
And when you think about that,you're like, huh, that's sort of
a weird way to invest.
So you're saying I just investmore if the price of the stock
goes up and less if it goes down, and that's it.
And you say yes, like well,that's weird, right?
Like what a strange way toinvest.
If you think about it, I meanit's the ultimate trend
following methodology, whenwe've done a lot of fun podcasts

(33:41):
with Hank Bessenbinder andothers talking about you know
why does that work?
And it works because a smallpercentage of stocks generate
all the returns.
So take five 10% of US stocksgenerate all the returns Apple,
microsoft, costco, on and onNvidia and the average stock
doesn't even beat T-bills.

(34:01):
And you know most stocks don'tbeat the broad market index.
But it's a curious way toinvest.
It works most of the time andit works well.
When does it not work?
The Achilles heel of a marketcap weight that Boris mentioned
I probably said in 2013, is whenthings go loony to the upside,
because usually you're puttingmost of the weight and things

(34:25):
that have gone up the most atthe worst possible time.
So think back to 99.
You're putting most of yourmoney and one of my favorite
tables is by decade, looking atthe top stocks in the S&P or
global, and often it's just thethings that have gone up, you
know, and are now in the topechelons, but usually they're

(34:46):
the most overvalued because theP and the PE goes up right.
So you become very vulnerableat these kind of bubble peak
levels.
Japan in the 80s is the classicexample.
Japanese stocks had almost PEof 100 and then went nowhere for
multiple decades.
But again, you look at theseperiods and so market cap

(35:07):
weighting.
One of my favorite charts everis and I think this was in this
book, if not, it's definitely onTwitter but it's the chart of
what if you invested in thelargest stock in the stock
market.
At the time it was the biggest.
So currently I think NVIDIA,I'm not sure Apple Anyway, it's
a horrible idea Underperformsthe S&P by multiple percentage
points per year.

(35:27):
This also applies to the top 10stocks in the index.
The top 10 stocks in any sector, the top 10 stocks in any
industry Underperforms by aboutthree percentage points per year
.
So you say, what's the easiestway to beat market cap weighting
?
You just take out the top 10market cap right or equal weight
is fine, or weight.
Any other method usually beatsby a percent or two.

(35:49):
However, you know giant asteriskis you have these periods, and
GMO has a chart of this, I thinkit's like the top 10 versus the
bottom 490.
And you know it's a terribleway to invest.
But every once in a while youhave this two, five, 10 year
period where the face ripper upright, where the top stocks just
go nuclear to the upside andthen it goes back down and

(36:13):
starts underperforming again.
It's just gravity and valuation, anyway.
So market cap we always saymarket cap weighting is fine.
It's just not ideal,particularly in periods where
things are really off sides,like today, you know, or like
2007 with the, the bricks,brazil, uh, russia, india, china
, india and china were in pratios of like, I think, 50, and

(36:37):
then they struggled for what?
15, 20 years.
So anyway, uh, we'll, we'llcarry on what we'll do?
One or two more of thesequestions, then we'll get to the
new topic on the 351.

Speaker 1 (36:49):
I think it's from Notes with Pogetor 130, 150%,
how do you think about where tobe within those bounds?

Speaker 2 (36:54):
That's just sort of the day-to-day gyrations.
We don't like to say 140% or150%, because sure enough
there's going to be a reader andbe like, I see you at 148%,
what are you doing?
And say, look, just, you knowthese things.

Speaker 1 (37:12):
we give it a little tolerance to move, but but in
reality it's sort of that one,that one 40 ish range.
And this is also a questionaround benchmarks.
Hard to find a benchmark forsomething like this, but how do
you benchmark the strategy?

Speaker 2 (37:21):
You know there's a couple.
I mean, everyone always lovesthe S&P because it's the only
one they know.
You know, 60-40 for the peoplewho are focused just on the US,
but really the NACUBO averageand that's like the body that
looks at all the assetallocation big endowments, small
endowments.
They do an amazing job.
They put out a yearly piece.

(37:42):
That just came out.
You guys should go read.
That's a great index, but it,you know, it looks a lot like 60
, 40 for the past 10, 20, 30years.
And one of the things that I'vebeen very critical of is
CalPERS and other largeinstitutions that have a hundred
, 500 billion dollars and weoften say is like, you know, you
guys have all the top resourcesin the world, how come you're

(38:02):
not outperforming?
And I think there's a lot ofstruggles and challenges when
you get to be a big institutionand we often joke they should
fire everyone and just buy someETFs.
And so one of the challenges ofbenchmarking I think we should
be able to beat the NACUBO andendowment averages, but again,
I'm not dunking on them becauseit's been a perfectly fine way

(38:25):
to invest.
Eight, nine, 10%, you knowthat's great, well done, but
they're not the 13% of Yale.
So every June 30th, which iswhen their fiscal year ends, you
know they start to report theirreturns in the fall We'll throw
a little annual shindig.
Invite you guys.
Unfortunately, it won't be till2026, because we need a full
year performance and then justtease them because, say hey, can

(38:49):
you beat a publicly listed ETF?
That's low cost and doesn't doanything?
It'll be fun to find out, andso correlation to the S&P and
treasuries is probably going tobe pretty low.
I mean, it's equity like right,we got a lot in stocks, but S&P
is going to only be probablyroughly half of the stock
allocation, and then we got allsorts of other stuff in there,

(39:12):
and so I imagine a lot of thetime it won't look that close to
the S&P answer on the numberthere it won't be zero and it
won't be negative, but it won'tbe one either.
Yeah, and we're using.
We're using futures and otherthings like that too, all right.

(39:32):
Well, let's get to this 351stuff, because this is the thing
none of y'all have heard of,and I think I said last year on
Twitter that this is going to bemore impactful than crypto ETFs
, and crypto ETFs raised ahundred billion dollars.
So what is a 351?
If those are familiar with.
1031 in real estate right.

(39:53):
You buy a building, you buysome land.
Your parents did it.
10, 20 years go by, went from amillion to 10 million bucks.
You can roll that over.
You can sell it, roll it intoanother property and not pay
capital gains Amazing taxdeferral right.
This is how generational wealthhas been built in the real
estate world for many decades.
Wouldn't it be nice if youcould do that in stocks?

(40:15):
You can't right.
Your choices today are sell,pay the tax man, die, contribute
it upon death, maybe give it tocharity.
You could do these old schoolexchange funds from Eden, vance
and Goldman, but you have tohold them for seven years.
You end up with a sort ofportfolio of whatever people
have contributed and you got toput 20% in this weird illiquid

(40:36):
bucket and they'll probablycharge you a percent and a half.
Knowing Eden and Goldman, it'sprobably less.
Today I hear they're up around80 pips now 1%, but who knows?
Ask them.
But it's not a particularlygreat solution Until now.
Anyway, what's 351?
351 has been the tax code formany, many, many decades and

(40:56):
there's actually been probably100 of these so far.
You guys have probably heard ofthe mutual fund ETF conversions
, dfa a hundred billion or so.
There's been some separateaccounts.
Etf conversions 351 allows youguys to contribute a portfolio.
So let's say you got 20 stocks.
You got all these mag seventech stocks.
You're like my God Meb, they'vebeen a 10 bagger.

(41:16):
I don't want them.
I have to sell them, diversify.
I want to buy bonds, realestate, all these other things,
but I can't.
This tax man's going to kill me.
You can seed our endowment ETF,all right.
So let's say you got aportfolio Schwab.
Your financial advisor, yourclient's, got a portfolio Schwab
.
Let's say you got concentratedstocks, all these things.
Direct indexing is a hugesolution for that.

(41:38):
You can say all right, I'mgoing to give you this portfolio
and then in return I get theETF and the ETF then becomes.
You know it runs its strategy,it's able to trade through
creation or deductions and thatis not a taxable event.
It's a tax deferral.
You don't wash the taxes thatwould be illegal but you do get
a deferral into a diversifiedportfolio and if you know
anything about ETFs, theyshouldn't pay any capital gains

(42:00):
going forward.
So now you've got thisdiversified portfolio, now
there's two rules.
If you've got this diversifiedportfolio.
Now there's two rules.
If you've got a hundred millionof NVIDIA, you can't just give
me a hundred million NVIDIA.
The top position can only be25% or less, so it has to be.
And then the top no more thanhalf the portfolio can be in
five positions.
So really you probably needlike 12 stocks or more.

(42:21):
Or and this is super cool ETFsare passed through.
So let's say, you really justwant to get rid of that NVIDIA.
You could give me 25 millionNVIDIA, 75 million in SPY.
Spy is diversified and all of asudden you have this a hundred
million dollar portfolio that isnow in this diversified

(42:42):
endowment style ETF.
Pretty cool, right?
So we did the first one ofthese in December and that was a
fund called tax T A X.
We raised about 30 million.
This one will be bigger.
Um, and the way that it worksis you know, we've been and if
you go to if you go to either ofour Cambria fund sites Cambria
funds, cambria investmentsthere's a three 51 tab with a
ton of PDF downloads, faqs,timelines, descriptions,

(43:08):
summaries, all that good stuff,webinars.
That walks you through it.
But you can see how this ideais massively impactful and
massively interesting.
People love to ask what they cancontribute.
The simple answer is publicsecurities, so stocks and I
don't want your micro cap youknow $10 million cannabis or

(43:29):
junior miners, so large, liquid,liquid, tradable or ETFs you
could contribute foreign stocksto.
Ideally, it's not in a cashmarket like Columbia or Brazil
or something needs to besomething we can trade.
Trade.
We can't take your privatemutual fund.
We can't take your real estate.
We can't take your fart coin ordoge coin.

(43:51):
Public stocks, public ETFs, arewonderful contributions, guy,
you heard fart coin.

Speaker 1 (43:57):
You won't tell us what you got.
You really can't take fart coin.

Speaker 2 (44:00):
Not yet.
Probably soon, though, we cantake crypto ETFs.
We'll do another webinar onthat at some point.
Yeah, yeah, yeah.
So so those are the basics ofwhat you can contribute.
I'm sure you guys have a lot ofquestions about this.
I'll go through some some ofthe ones that people ask the
most often.
You know what's the timeline?
Well, we're doing this one forendowment.

(44:23):
Our goal is to hopefully dothis for every ETF we launch.
Say, look, once it's launched,you want to buy it, just like
any of our other 16, 17 ETFs.
Great, but if you want to seedit, let's have that conversation
.
So we have a lot of financialadvisors that are coming to us
with not just one portfolio, but10 or 20.
We have direct indexing peoplecoming to us, and then we have

(44:46):
individuals, too Individuals.
You know we try to have youwork with an advisor.
Fidelity and Schwab doesn'tlove just bringing individuals
on.
It's a lot of herding cats, andso we have advisors you can
work with if not, buttraditionally advisors Fidelity
and Schwab love us.
There's a whole host of otherbrokerages that are on various
levels of approve not approve,okay, not okay but most of them

(45:10):
are coming around to thisbecause Goldman just did one for
a billion dollars.
You got a bunch of thesecompanies that are leaning into
this 351 idea because it solvesa major headache for many
investors, which is they're nowoffsides and they have way too
much in US stocks.
As far as timelines, if you guysare interested in this idea,
reach out to me today, this week, our sales team, anyone else we

(45:32):
can walk you through it.
It's not as complicated as youthink.
It's actually prettystreamlined.
If you want to do it,particularly if you have a
somewhat diversified portfolioand the way that it works is.
So this March we kind of walkyou through it.
We you gotta send us a exceltax lot which we can send you.
The template.
Be like I own this much nvidia,this much apple, this much app

(45:52):
loving.
Send it back and, um, you knowthe client will sign a form and,
uh, you know, a day or twobefore launch, the positions
transfer and then you open youraccount at Schwab the day of the
launch and guess what, insteadof all your positions you got
E&DW.
Now the cool part is the taxbasis for each position

(46:14):
transfers over.
So let's say you transfer 20stocks, you'll now have 20
different original tax costbases for E&DW.
Let's say you transfer justnvidia and spy.
Well, if you bought nvidia at adollar, you'll now have endw at
a dollar.
And let's say you had no gainon spy, you'll have endw at no
gain.
So very cool.

(46:35):
Um, tax management, I thinkthere's going to be a revolution
in tax location ideas in thenext five years.
Uh, 351 being just one of thosearrows in the quiver.
You know people were asking usabout fact sheets and PDFs.
Again, for 351, stuff, we gotit For E&DW.
If you want to look at the kindof suggested holdings, the

(46:58):
generic portfolio allocation,you can, uh, you can send it.
Uh, send me an email and wewill um, uh, you know, uh, send
it to you.
And as far as the requirementson the ETF, people ask us like
what's the minimum?
You know, we, we say a millionfor financial advisors.
We try to say 10 million, likewe don't want you to mess around

(47:20):
with just one account, that'slike 500 grand, because it's
probably a headache for you,it's a headache for us.
Um, but, uh, but you know we're, we're somewhat flexible with
that.
Um.
And as far as we had a questionof can we just give you 100 of
one stock, we, I think we'llhave a solution for that this
summer, not yet, um, so stickaround, just wait.

(47:44):
Uh, it needs to be somewhatdiversified.
You can somewhat russian dollit, you know.
So, like say you got 100million nvidia, you know you
could do nvidia across three orfour funds and and be done with
it, uh.
But if you want to just get ridof it all at once, uh, talk to
me again in a month or two.
I think we'll have a solutionfor you.
Got to come back to the nextguide webinar.
We do in a few months, buttoday, that's not today.

Speaker 1 (48:07):
This is also going to be available on the YouTube
channel on the LeadLag reportside of things.
So for those that want tore-listen to things, you'll get
another opportunity.
Any parting thoughts here, Meb?

Speaker 2 (48:17):
Yeah, I got a lot.
I mean, you know, for those whoare like Meb, this is amazing.
This is the best thing I'veever heard.
351,.
What an incredible concept.
But I'm going on spring break,I'm going to watch March Madness
.
I just can't turn this aroundby.
You know, april 10th launch.
You know we'll have fund three,fund four, probably like late

(48:39):
summer, and then Q4 kind of it'slike.
It's like once a quarter openenrollment is the way we're
going about this.
Now the problem is the buffetchanges.
Where fund one was us stocks,fund two is this diversified
portfolio, fund three will be aglobal equal weight on stocks.
So, going back to my market capcomments, however, you know, if
you got 100 million, 500million, a billion and you're

(49:01):
like meb, let's do somethingcustom.
We're open to thoseconversations too, too, where we
could do a custom idea.
But certainly reach out.
We can have that chat.
And if you guys want to comesay hi in Manhattan Beach we're
located here in Los Angeles andtalk about it over lunch or a
pint or a taco, let us know aswell.
What was that restaurant that Imet you at?

(49:21):
What was the name of that?
Where did MB post?

Speaker 1 (49:26):
Post.
That's right, that was a verygood one.

Speaker 2 (49:29):
Yeah.

Speaker 1 (49:29):
I literally flew in folks same day from New York to
LA to see Meb just to have anice dinner with him.
That's how much I value it.

Speaker 2 (49:35):
Where is?

Speaker 1 (49:36):
it when it takes half a day.
Thank you for joining.
I appreciate those that arehere and hopefully we'll see you
on the next webinar.

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